Roubini: The Longer-Term Picture Is Bleaker And The Next Crisis Could Be Just Two Months Away. The “Mini Deal” On The Fiscal Cliff Dodged All The Important Questions.

Submitted by IWB, on January 2nd, 2013

Experts: Stock Market Relief Over Fiscal Cliff Deal Will Be Brief. First Quarter Is Going To Be Choppy

The stock market bounce following the deal avoiding the fiscal cliff will probably be brief, as financial markets face a rough two months ahead, experts told CNBC.

Congress begins its true test when it starts talks over increasing the government’s debt ceiling. And the stakes are even higher. Failure to raise the limit would mean government default.

“This will plague us at least until the end of the first quarter because we have got these discussions about raising the debt ceiling, which will lump all negotiations — expenditure, tax hikes — into one,” Andrew Economos of JPMorgan Asset Management told CNBC.

“I think the problem for markets going forward is the fact that we are really not addressing the debt ceiling issue until the 28 February deadline,” he told CNBC. “So unfortunately, we are going to get a couple of months of volatility.”

For all the p#$%^&* and moaning over the fiscal cliff, there was never much of a “cliff” in the first place. Worse yet, every delay made matters increasing irresponsible in terms of addressing the deficit.

The final result, as passed by the Senate, watered-down budget cuts from $600 billion to a mere $12 billion.

Moreover, the extension of the tax cuts will add almost $4 trillion to the deficit over 10 years, according to the CBO analysis of the American Taxpayer Relief Act….

The next crisis according to Roubini could be just two months away, with spending cuts set to kick in at about the same time that the U.S. hits the debt ceiling. This is going to begin another “messy” debate between Democrats and Republicans.

“The longer-term picture is bleaker still. The reality is that America is yet to wake up to the full extent of its fiscal nightmare. Even the typical Republican voter is not – being on average older and poorer than a Democrat voter – in favour of gutting the welfare state. Tea Party extremists are more noise than signal. That is why the plans of Mitt Romney and Paul Ryan, the Republicans’ losing presidential ticket, postponed all the tough spending cuts on Social Security and Medicare by a decade.

Neither Democrats nor Republicans recognize that maintaining a basic welfare state, which is right and necessary in our age of globalization, rapid technological change and demographic pressure, implies higher taxes for the middle class as well as for the rich. A deal that extends unsustainable tax cuts for 98 per cent of Americans is therefore a pyrrhic victory for Mr Obama.
…In short, the “mini deal” on the fiscal cliff dodged all the important questions. By not including spending cuts in the deal, the Democrats have emboldened Republicans who are determined to slash taxes but lack a plan to pay for it. It is again up to Washington’s policy makers to fix the problem before the market does it for them. Tuesday’s deal suggests this will not happen with any ease.”

One, we are still getting some fiscal drag this year; and two, there are still big budget battles that need to be fought; this, in turn, could further depress business confidence with negative implications for spending and hiring.

He does some math to make his case: the expiration of the payroll tax credit will create a -0.75 point gash in GDP growth. And the new, higher tax rates on marginal income, dividends and capital gains will create an additional drag of up to -0.25 points.

Thus, “we are likely to get at least a one percentage point drag on 2013 real GDP,” he writes.

…

Michael Farr: Skeptical of rally and fiscal farce

The rally on Wall Street might not last, according to Michael Farr of Farr, Miller and Washington. He tells Joan Doniger prospects for earnings have gotten worse as a result of the deal Congress reached.